# ASC 815-40-15: Derivatives and Hedging — Contracts in Entity's Own Equity — 15 Scope and Scope Exceptions Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/815/40/#15-scope-and-scope-exceptions) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:be4d08a6647abeec51518dee0ebb0ecf9233003abe216105aed83e17f8e33450 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 815-40-15: 15 Scope and Scope Exceptions [Read section](https://asc.understandingaccounting.org/asc/815/40/#15-scope-and-scope-exceptions) SEC content: no #### Entities ##### [815-40-15-1](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:0bf6e815fa7de5ed0d6085195421fe65cfd8760a2001b61d553e56783aeed924 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this Subtopic applies to all entities. #### Instruments ##### [815-40-15-2](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:cf6c1e19e4acc0fae11a05629937a5aece27cc07a8ae4b267ccf86da5773fd72 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this Subtopic applies to [freestanding contracts](https://asc.understandingaccounting.org/glossary/f/#freestanding-contract "A freestanding contract is entered into either: Separate and apart from any of the entity's other financial instruments or equity transactions In conjunction with some other transaction and is legally detachable and separately exercisable.") that are potentially indexed to, and potentially settled in, an entity's own stock. ##### [815-40-15-2A](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-2A) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:58fde1023b7b64a78af07d68b47517a7819c3df9d4ebc71d74fd69a1402a4fb7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The scope of this Subtopic includes security price guarantees or other [financial instruments](https://asc.understandingaccounting.org/glossary/f/#financial-instrument "Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. All contractual rights (contractual obligations) that are financial instruments meet the definition of asset (liability) set forth in FASB Concepts Statement No. 6, Elements of Financial Statements, although some may not be recognized as assets (liabilities) in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity. (P) December 16, 2024; (N) December 16, 2025105-10-65-9Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. Some contractual rights (contractual obligations) that are financial instruments may not be recognized in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity.") indexed to, or otherwise based on, the price of the entity's stock that are issued in connection with a business combination and that are accounted for as contingent consideration. ##### [815-40-15-3](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:0195843693256f16da0b86fdc1d9a856dd4a316ea2522a3a2cfde68da02eecbc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this Subtopic does not apply to any of the following: 1. a [Subparagraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). 2. b Contracts that are issued to compensate grantees in a [share-based payment arrangement](https://asc.understandingaccounting.org/glossary/s/#share-based-payment-arrangements "An arrangement under which either of the following conditions is met: One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments. The entity incurs liabilities to suppliers that meet either of the following conditions: The amounts are based, at least in part, on the price of the entity's shares or other equity instruments. (The phrase at least in part is used because an award may be indexed to both the price of the entity's shares and something other than either the price of the entity's shares or a market, performance, or service condition.) The awards require or may require settlement by issuance of the entity's shares. The term shares includes various forms of ownership interest that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. Equity shares refers only to shares that are accounted for as equity. Also called share-based compensation arrangements.")within the scope of Topic 718 3. c [Subparagraph superseded by Accounting Standards Update No. 2018-07](https://asc.understandingaccounting.org/updates/asu-2018-07/). 4. d A written put option and a purchased call option embedded in the shares of a noncontrolling interest of a consolidated subsidiary if the arrangement is accounted for as a financing under the guidance beginning in paragraph [480-10-55-53](https://asc.understandingaccounting.org/asc/480/10/#480-10-55-53) 5. e Financial instruments that are within the scope of Topic 480 (see paragraph [815-40-15-12](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-12)). ##### [815-40-15-4](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:ad18aef3a0927010a9cf4847b2b33c0aff7b52c70bf3143303168926f40d2ff0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this Subtopic applies to derivatives embedded in contracts in analyzing the embedded feature under paragraphs [815-15-25-1(c)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) and [815-15-25-14](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-14) as though it were a freestanding instrument (as further discussed in paragraphs [815-40-25-39 through 25-40](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-39) ). #### Evaluating Whether an Instrument or Embedded Feature Is Considered Indexed to an Entity's Own Stock ##### [815-40-15-5](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:d8a38212cbc697b86330bebf40f25fe479486fc91dbce20fb2c5159e7d051e97 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this paragraph through paragraph [815-40-15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-8) applies to any [freestanding financial instrument](https://asc.understandingaccounting.org/glossary/f/#freestanding-financial-instrument "A financial instrument that meets either of the following conditions: It is entered into separately and apart from any of the entity's other financial instruments or equity transactions. It is entered into in conjunction with some other transaction and is legally detachable and separately exercisable.") or embedded feature that has all the characteristics of a [derivative instrument](https://asc.understandingaccounting.org/glossary/d/#derivative-instrument "Paragraphs 815-10-15-83815-10-15-84815-10-15-85815-10-15-86815-10-15-87815-10-15-88815-10-15-89815-10-15-90815-10-15-91815-10-15-92815-10-15-93815-10-15-94815-10-15-95815-10-15-96815-10-15-97815-10-15-98815-10-15-99815-10-15-100815-10-15-101815-10-15-102815-10-15-103815-10-15-104815-10-15-105815-10-15-106815-10-15-107815-10-15-108815-10-15-109815-10-15-110815-10-15-111815-10-15-112815-10-15-113815-10-15-114815-10-15-115815-10-15-116815-10-15-117815-10-15-118815-10-15-119815-10-15-120815-10-15-121815-10-15-122815-10-15-123815-10-15-124815-10-15-125815-10-15-126815-10-15-127815-10-15-128815-10-15-129815-10-15-130815-10-15-131815-10-15-132815-10-15-133815-10-15-134815-10-15-135815-10-15-136815-10-15-137815-10-15-138815-10-15-139 define the term derivative instrument.") (see the guidance beginning in paragraph [815-10-15-83](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83)). That guidance applies for the purpose of determining whether that instrument or embedded feature qualifies for the first part of the scope exception in paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74). That guidance does not address the second part of the scope exception in paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74), which is addressed in Section 815-40-25. The guidance also applies to any freestanding financial instrument that is potentially settled in an entity's own stock, regardless of whether the instrument has all the characteristics of a derivative instrument for purposes of determining whether the instrument is within the scope of this Subtopic. ##### [815-40-15-5A](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5A) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:7c4d79893a47118ef47893ca025978ea545c3fe276fa8b0d02c48187fbe0caa8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this paragraph through paragraph [815-40-15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-8) does not apply to share-based payment awards within the scope of Topic 718 for purposes of determining whether instruments are classified as liability awards or equity awards under that Topic. Equity-linked financial instruments issued to investors for purposes of establishing a market-based measure of the grant-date fair value of employee stock options are not within the scope of Topic 718 themselves. Consequently, the guidance in this paragraph through paragraph [815-40-15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-8) applies to such market-based share-based payment stock option valuation instruments for purposes of making the determinations described in paragraph [815-40-15-5](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5). ##### [815-40-15-5B](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5B) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:308ff3bff3d42835d381bc00a125baa23e97f3957c0844462e2016a02ea744d5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in paragraphs [815-40-15-5 through 15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) shall be applied to the appropriate unit of accounting, as determined under other applicable U.S. generally accepted accounting principles. For example, if an entity issues two freestanding financial instruments and concludes that those two instruments are required to be accounted for separately, then the guidance in paragraphs [815-40-15-5 through 15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) shall be applied separately to each instrument. In contrast, if an entity issues two freestanding financial instruments and concludes that those two instruments are required to be linked and accounted for on a combined basis as a single financial instrument (for example, pursuant to the guidance in paragraph [815-10-15-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-8)), then the guidance in paragraphs [815-40-15-5 through 15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) shall be applied to the combined financial instrument. ##### [815-40-15-5C](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5C) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:72aeaabe52511aa7785cdbacf5f8e3db91498421eb73675f18dafe63c1f60305 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Freestanding financial instruments (and embedded features) for which the payoff to the counterparty is based, in whole or in part, on the stock of a consolidated subsidiary are not precluded from being considered indexed to the entity's own stock in the consolidated financial statements of the parent if the subsidiary is a substantive entity. If the subsidiary is not a substantive entity, the instrument or embedded feature shall not be considered indexed to the entity's own stock. If the subsidiary is considered to be a substantive entity, the guidance beginning in paragraph [815-40-15-5](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) shall be applied to determine whether the freestanding financial instrument (or an embedded feature) is indexed to the entity's own stock and shall be considered in conjunction with other applicable GAAP (for example, this Subtopic) in determining the classification of the freestanding financial instrument (or an embedded feature) in the financial statements of the entity. The guidance in this paragraph applies to those instruments (and embedded features) in the consolidated financial statements of the parent, whether the instrument was entered into by the parent or the subsidiary. The guidance in this paragraph does not affect the accounting for instruments (or embedded features) that would not otherwise qualify for the scope exception in paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74). For example, freestanding instruments that are classified as liabilities (or assets) under Topic 480 and put and call options embedded in a noncontrolling interest that is accounted for as a financing arrangement under Topic 480 are not affected by this guidance. For guidance on presentation of an equity-classified instrument (including an embedded feature that is separately recorded in equity under applicable GAAP) within the scope of the guidance in this paragraph, see paragraph [810-10-45-17A](https://asc.understandingaccounting.org/asc/810/10/#810-10-45-17A). ##### [815-40-15-5D](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5D) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:105135dc62f7d1f11d41be18846005aafb28d78e2d8ccb2200e49739b50dd55a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. When classifying a financial instrument with a [down round feature](https://asc.understandingaccounting.org/glossary/d/#down-round-feature "A feature in a financial instrument that reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike price of the issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued financial instrument. A down round feature may reduce the strike price of a financial instrument to the current issuance price, or the reduction may be limited by a floor or on the basis of a formula that results in a price that is at a discount to the original exercise price but above the new issuance price of the shares, or may reduce the strike price to below the current issuance price. A standard antidilution provision is not considered a down round feature."), the feature is excluded from the consideration of whether the instrument is indexed to the entity's own stock for the purposes of applying paragraphs [815-40-15-7C through 15-7I](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7C) (Step 2). ##### [815-40-15-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:86b555e027c4c75a5db850aa5c641d765a77450bfec8cd4508882b18677add60 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this paragraph applies to both the issuer and the holder of the instrument. Outstanding instruments within the scope of the guidance in paragraphs [815-40-15-5 through 15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) shall always be considered issued for accounting purposes, except as discussed in the next sentence. [Lock-up options](https://asc.understandingaccounting.org/glossary/l/#lock-up-options "Contingently exercisable options to purchase equity securities of another party to a business combination, at favorable prices, to encourage successful completion of that combination. If the merger is consummated as proposed, the options expire unexercised. If, however, a specified event occurs that interferes with the planned business combination, the options become exercisable.") shall not be considered issued for accounting purposes unless and until the options become exercisable. ##### [815-40-15-7](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:17d505f31893c1a5e3250964e86b2c8fbfd29b473e950586ddfc1aa910998f02 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall evaluate whether an equity-linked financial instrument (or embedded feature), as discussed in paragraphs [815-40-15-5 through 15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) is considered indexed to its own stock within the meaning of this Subtopic and paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74) using the following two-step approach: 1. a Evaluate the instrument's contingent exercise provisions, if any. 2. b Evaluate the instrument's settlement provisions. ##### [815-40-15-7A](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7A) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:b7ef68622d9776dbac84add045bc28189a92985a2e74b7725c63d6a94b0e761d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An [exercise contingency](https://asc.understandingaccounting.org/glossary/e/#exercise-contingency "A provision that entitles the entity (or the counterparty) to exercise an equity-linked financial instrument (or embedded feature) based on changes in an underlying, including the occurrence (or nonoccurrence) of a specified event. Provisions that accelerate the timing of the entity's (or the counterparty's) ability to exercise an instrument and provisions that extend the length of time that an instrument is exercisable are examples of exercise contingencies.") shall not preclude an instrument (or embedded feature) from being considered indexed to an entity's own stock provided that it is not based on either of the following: 1. a An observable market, other than the market for the issuer's stock (if applicable) 2. b An observable index, other than an index calculated or measured solely by reference to the issuer's own operations (for example, sales revenue of the issuer; earnings before interest, taxes, depreciation, and amortization of the issuer; net income of the issuer; or total equity of the issuer). If the evaluation of Step 1 (this paragraph) does not preclude an instrument from being considered indexed to the entity's own stock, the analysis shall proceed to Step 2 (see paragraph [815-40-15-7C](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7C)). ##### [815-40-15-7B](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7B) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:434b12fbb29150986d630e44227540e53f33f46e658f687dcf784e57f78ce28b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an instrument's strike price or the number of shares used to calculate the settlement amount would be adjusted upon the occurrence of an exercise contingency, the exercise contingency shall be evaluated under Step 1 (see the preceding paragraph) and the potential adjustment to the instrument's settlement amount shall be evaluated under Step 2 (see the guidance beginning in the following paragraph). ##### [815-40-15-7C](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7C) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:c386231a4cc15da480a83974b187e481a2b9ee934db6a80e86304b6df5141e83 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Unless paragraph [815-40-15-7A](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7A) precludes it, an instrument (or embedded feature) shall be considered indexed to an entity's own stock if its settlement amount will equal the difference between the following: 1. a The fair value of a fixed number of the entity's equity shares 2. b A fixed monetary amount or a fixed amount of a debt instrument issued by the entity. For example, an issued share option that gives the counterparty a right to buy a fixed number of the entity's shares for a fixed price or for a fixed stated principal amount of a bond issued by the entity shall be considered indexed to the entity's own stock. ##### [815-40-15-7D](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7D) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:e9faff05a1397dec794b765088cc661b3fb101bd4a668a986db380bb77f267d4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An instrument's strike price or the number of shares used to calculate the settlement amount are not fixed if its terms provide for any potential adjustment, regardless of the probability of such adjustment(s) or whether such adjustments are in the entity's control. If the instrument's strike price or the number of shares used to calculate the settlement amount are not fixed, the instrument (or embedded feature) shall still be considered indexed to an entity's own stock if the only variables that could affect the settlement amount would be inputs to the fair value of a fixed-for-fixed forward or option on equity shares (provided that paragraph [815-40-15-7A](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7A) does not preclude such a conclusion). ##### [815-40-15-7E](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7E) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:3cc07ae0f88c43fc92d61cccd363fc90852f0c65517f5f4ee00031a49888d7a1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A fixed-for-fixed forward or option on equity shares has a settlement amount that is equal to the difference between the price of a fixed number of equity shares and a fixed strike price. The fair value inputs of a fixed-for-fixed forward or option on equity shares may include the entity's stock price and additional variables, including all of the following: 1. a Strike price of the instrument 2. b Term of the instrument 3. c Expected dividends or other dilutive activities 4. d Stock borrow cost 5. e Interest rates 6. f Stock price volatility 7. g The entity's credit spread 8. h The ability to maintain a standard hedge position in the underlying shares. Determinations and adjustments related to the settlement amount (including the determination of the ability to maintain a standard hedge position) shall be commercially reasonable. ##### [815-40-15-7F](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7F) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:8d88dd575982e86f89b3484988017ad326b02054327e189eb1a4d10388d70ace Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An instrument (or embedded feature) shall not be considered indexed to the entity's own stock if its settlement amount is affected by variables that are extraneous to the pricing of a fixed-for-fixed option or forward contract on equity shares. An instrument (or embedded feature) shall not be considered indexed to the entity's own stock if either: 1. a The instrument's settlement calculation incorporates variables other than those used to determine the fair value of a fixed-for-fixed forward or option on equity shares. 2. b The instrument contains a feature (such as a leverage factor) that increases exposure to the additional variables listed in the preceding paragraph in a manner that is inconsistent with a fixed-for-fixed forward or option on equity shares. ##### [815-40-15-7G](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7G) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:0131d4c6f18da0853a9c8b55cf99fb2ccc557d7b09e0120b0eebad5ed0f9ee24 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Standard pricing models for equity-linked financial instruments contain certain implicit assumptions. One such assumption is that the stock price exposure inherent in those instruments can be hedged by entering into an offsetting position in the underlying equity shares. For example, the Black-Scholes-Merton option-pricing model assumes that the underlying shares can be sold short without transaction costs and that stock price changes will be continuous. Accordingly, for purposes of applying Step 2, fair value inputs include adjustments to neutralize the effects of events that can cause stock price discontinuities. For example, a merger announcement may cause an immediate jump (up or down) in the price of shares underlying an equity-linked option contract. A holder of that instrument would not be able to continuously adjust its hedge position in the underlying shares due to the discontinuous stock price change. As a result, changes in the fair value of an equity-linked instrument and changes in the fair value of an offsetting hedge position in the underlying shares will differ, creating a gain or loss for the instrument holder as a result of the merger announcement. Therefore, inclusion of provisions that adjust the terms of the instrument to offset the net gain or loss resulting from a merger announcement or similar event do not preclude an equity-linked instrument (or embedded feature) from being considered indexed to an entity's own stock. ##### [815-40-15-7H](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7H) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:0ce25b60ca9512b4cee9ffea6f7dea6f747d575819faccb312ed9d8e8f0c59a6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Some equity-linked financial instruments contain provisions that provide an entity with the ability to unilaterally modify the terms of the instrument at any time, provided that such modification benefits the counterparty. For example, the terms of a convertible debt instrument may explicitly permit the issuer to reduce the conversion price at any time to induce conversion of the instrument. For purposes of applying Step 2, such provisions do not affect the determination of whether an instrument (or embedded feature) is considered indexed to an entity's own stock. ##### [815-40-15-7I](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-7I) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:ba1f44b365f32e42ae8f6b8d30d1472820083fe056608e464fdc8673065cecc7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The issuer of an equity-linked financial instrument incurs an exposure to changes in currency exchange rates if the instrument's strike price is denominated in a currency other than the functional currency of the issuer. An equity-linked financial instrument (or embedded feature) shall not be considered indexed to the entity's own stock if the strike price is denominated in a currency other than the issuer's functional currency (including a conversion option embedded in a convertible debt instrument that is denominated in a currency other than the issuer's functional currency). The determination of whether an equity-linked financial instrument is indexed to an entity's own stock is not affected by the currency (or currencies) in which the underlying shares trade. ##### [815-40-15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:12d171f3a3c11afacd732c82b0db54c379282ebb076301af256009b8b09aa11d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Examples 2-21 (see paragraphs [815-40-55-26 through 55-48](https://asc.understandingaccounting.org/asc/815/40/#815-40-55-26) ) illustrate the application of the guidance in paragraphs [815-40-15-5 through 15-7](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) . These examples do not address whether an instrument (or embedded feature) is classified in equity (or would be classified in equity if freestanding). These examples also do not address whether the instrument is within the scope of Topic 480 or whether the instrument would be subject to the two-class method under Topic 260. ##### [815-40-15-8A](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-8A) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:555c184fd71a3e6e8cfe7fe04c37810174587005136649e6cd18c09449e497e5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the instrument does not meet the criteria to be considered indexed to an entity's own stock as described in paragraphs [815-40-15-5 through 15-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-5) , it shall be classified as a liability or an asset. See paragraph [815-40-35-4](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-4) for subsequent measurement guidance for those instruments. See paragraph [815-40-15-9](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-9) for guidance on the interaction with this Subtopic and Subtopics 815-10 and 815-15 for derivative instruments and embedded derivatives. #### Other Considerations ##### [815-40-15-9](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:b1b44d6107245d0fabff01534268e8cfdcf76da365eafecbcc0e9a21bced0a09 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For guidance on the interaction of this Subtopic and Subtopic 815-10, see paragraphs [815-10-15-74 through 15-78](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74) . For guidance on the interaction of this Subtopic and Subtopic 815-15, see paragraph [815-15-25-15](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-15). ##### [815-40-15-10](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:0e14132cb5e62dbb7a645512136b9e0bcce2d715802485e813381a5eedde941a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Topic 460 provides an exception from its initial recognition and initial measurement requirements, but not its disclosure provisions, for a guarantee for which the guarantor's obligation would be reported as an equity item (rather than a liability) under generally accepted accounting principles (GAAP). ##### [815-40-15-11](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:345ddbf8489d3e798e8a1d154cd800b766e8366498b9b37cc841f32f8546ea62 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a contract under this Subtopic is required to be accounted for as a liability under this Subtopic and also meets the definition of a guarantee under Topic 460 (for example, a [physically settled](https://asc.understandingaccounting.org/glossary/p/#physical-settlement "The party designated in the contract as the buyer delivers the full stated amount of cash to the seller, and the seller delivers the full stated number of shares to the buyer.") written put option), both this Subtopic and that Topic are consistent with respect to requiring the issuer to account for the contract at [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") at the initial measurement date. In that situation, the guarantee would also be subject to the disclosure requirements of Topic 460. ##### [815-40-15-12](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:0f5dd7c729fda5d06a6b75d3ada88e4aa86497c64198c2978cefaf21e2f09e6e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [480-10-15-5](https://asc.understandingaccounting.org/asc/480/10/#480-10-15-5) explains that Topic 480 does not apply to a feature embedded in a financial instrument that is not a derivative instrument in its entirety (for example, a written put option embedded in a nonderivative host contract) in analyzing the embedded feature as though it were a separate instrument as required by paragraph [815-15-25-1(c)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1). Therefore, this Subtopic applies in evaluating those embedded features under Subtopic 815-15. ##### [815-40-15-13](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:38:51.967Z to 2026-09-10T01:38:51.967Z Record version: sha256:03a19e6a93b29897d638404aee19f67b7a4c8fc27e482b9e3a79fd78cce97af8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/).